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Divorce & assets protection: the marital home and equitable distribution

By Kevin M. Kilcommons, Esq.

A majority of my divorce cases involve the equitable distribution of real estate. Over the past ten years, and particularly during the most recent upsurge in home values here in the East as well as in the West, market conditions have greatly increased the average equitable interest in residential real estate. As a result, one’s marital interest in the home is often just as valuable as pension benefits, and certainly more valuable than stock portfolios. For this reason, divorcing couples must give as much thought about how their marital interests in the home are to be reconciled as they would to the distribution of other marital assets. As is the case with many critical decisions in life, timing is important.

A. Do we sell the home or can I keep it until the children finish school?

There are several possible scenarios for the settlement of marital interests in real estate. First, one party can remain in the home, refinance within an agreed time period after the divorce, and then pay the ex-spouse their marital share. This option can work if the owning spouse has the financial wherewithal to shoulder the cost of the mortgage, taxes and maintenance going forward. This is a very difficult decision to make, because the economic realities may be clouded by the parent’s wish to keep the home for the benefit of the children. To assist you in making this important decision, seek the advice of your attorney, accountant and/or financial advisor.

Second, the moving spouse can defer payment of their interest for an agreed period until the timing is right to sell the home. This choice is often desirable to permit continuity in the lives of the children (i.e., until they have completed high school or college). As with any of these options, you must consult an accountant and/or financial advisor concerning IRS regulations. Ask about the Internal Revenue Code requirements on the sale of property relative to divorce and in particular, when the marital exemption on gains up to $500,000.00 is lost; and further, the ramifications of this change in status to the single homeowner selling years after the divorce.

Third, the parties may decide that leasing the home is the best option in a poor market where the sale price may not satisfy the mortgage, home equity line of credit and closing costs. You do not want to put yourself in the position of having to write a check at the closing to pay off these debts. Before you sign a contract to sell your home, or a listing agreement with the realtor, obtain an attorney and an accountant’s advice on the best course for you.

B. We have to sell, but when? Before or after the divorce?
If the finances do not allow one spouse, and children, to stay in the home, then consider when is the best time to sell. Of course, the likely response is to sell the home when the market is most active in your region. However, marital break-ups do not usually coincide with the most active marketing seasons in your region. Moreover, even though the spouses may both be ready to part, issues in the divorce (i.e. alimony and equitable distribution of other assets) may deem it unwise to rush the home onto the market.

First lesson, do not place your home on the market until you have consulted with your attorney. Now you would expect an attorney to say such a thing, but consider this potential pitfall: The net proceeds of the home sale may be the only liquid assets available to balance any inequities in other marital assets, such as pension benefits, stock portfolios or a business. Take a business owned in whole or in part by the husband as an example: What is the wife’s marital interest in that business? The husband, and certainly his partners, has no wish to divide his partnership interest with the wife in the settlement, thus making her a principal in the business. Further, the business must be evaluated to determine the husband’s interest, which takes time to complete and will involve one or more experts.

Once the evaluation is completed and, idealistically, the parties agree upon the amount of the husband’s business interest, how will he then pay the wife? A common manner in which to satisfy her interest is from his share of the proceeds from the home. However, if the home is already sold and the assets disbursed to the two parties before a final settlement of all assets is signed, then one party may come up short when all the marital assets have finally been valued (such as the spouses’ respective interests in one another’s pensions or 401ks). One way to avoid this conundrum is to place the net proceeds from the home sale in an attorney’s escrow account until all equitable issues are resolved.

Another reason to put off a sale of the home before a final settlement, or a judgment of the court, is that the spouse may be entitled to alimony but have no idea what income they will realize until the issue is resolved. Alimony is a very difficult matter to resolve and often takes more time and effort than any other dissolution issue, as any practitioner, mediator and judge will affirm. Until the supported spouse knows what their alimony income will be, they cannot make reasoned and informed decisions about the future. In fact, the supported spouse may come to realize that income from the alimony together with a job make it feasible to refinance and keep the home. However, if you rush to sell at the outset of the divorce, you will have lost the opportunity to make this choice.

Second lesson, do not sell your home before finding a full-time professional realtor with an excellent reputation for guarding his/her clients’ best interests. From a real estate perspective, the sale may have to wait because the home has suffered deferred maintenance and requires substantial work before it can be placed on the market. Also, the stress of the break-up, added to the stress of dealing with the many issues arising in real estate transactions, will make it all the more difficult for the couple to make informed, rational decisions during negotiations of the sale terms or, once the contract is executed, over the buyer’s repair demands.

The sale of your home is perhaps the second most important aspect of a divorce in which the adversaries, husband and wife, must cooperate with one another and stay on the same page. (The first one, of course, is working together as responsible parents.) If the couple cannot speak as one and present the home in the best light, then the sale price will suffer, because the home may not show well due to maintenance issues and the buyer may sense the sellers’ distress and offer far less than the asking price. To stay on track, remember that although you may no longer care for one another, you are still business partners in the ownership of your home, and as such, you have a common interest to protect. So, avoid scotching a fair deal over animosity.

Third lesson: Do not sell your home, or decide to keep the home and pay-off your spouse, until you have consulted with a Certified Public Accountant. This bears repeating, because you must know the tax consequences of selling or keeping the home. For instance, what is your tax basis and are you entitled to the $500,000.00 capital exemption? Or, by buying out the spouse, what will be your tax liability in the future when you do sell and have only the benefit of a $250,000.00 exemption as a single person? Know the answers to these questions before listing the home.
The costs associated with obtaining this valuable information may not be very great and considering the value of your marital home, well worth the consultation fees, if any. In the case of the CPA, you may both seek the advice of this professional and share the cost. As for the realtor, this type of advice earns them the commission.
This article has merely touched upon the several issues involved in a decision to sell the marital residence or the buy-out of a spouse’s interest. Consult the professionals before deciding what course of action serves the best interests of your children and makes the most financial sense for you.

Kevin Kilcommons is a licensed New Jersey attorney located in Clinton Township, Hunterdon County. He is a founding member of Kilcommons Shanahan, LLC and concentrates his practice in the fields of family, business and real estate law. See website.

© 2005 Kevin M. Kilcommons
With permission to Responsible Divorce to publish.

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